OREANDA-NEWS. August 03, 2015. In an important case related to investment selection in defined contribution (DC) plans, the United States Supreme Court recently issued its decision in Tibble v. Edison International. In this case, 401(k) participants sued the plan sponsor for offering retail class shares of some of the plan's funds instead of less expensive institutional class shares.

Essentially, the high court ruled that DC plan fiduciaries have a continuing duty to monitor investments and remove imprudent ones—an ongoing duty that's so crucial that the high court said that it resets the clock on the six-year statute of limitations that had been applied to bar litigation related to imprudent investments.

Although the Supreme Court only ruled on the timing of the participants' claims—and sent the key questions about relative costs of the investment and other factors back to the lower courts—the decision affirms the importance of carefully monitoring plan investments, said Josh Bobrin, associate counsel in the ERISA and Fiduciary Services practice of Vanguard Legal Department. "The Tibble decision aligns with the investment-monitoring philosophy Vanguard always advocates to our clients," he said. "For example, our Strategic Retirement Consulting group is just one of the teams that work with plan sponsors to help ensure that they have the appropriate processes in place to help them comply with their ongoing duty to monitor."

Digging deeper into the decision

In the Tibble case, several individual beneficiaries of the Edison 401(k) Savings Plan sued the company in 2007, claiming that Edison violated its fiduciary duty by offering six higher-priced retail class mutual funds as plan investments when nearly identical lower-priced institutional class funds were available. A U.S. District Court in California agreed with the plaintiffs regarding the three funds added to the plan in 2002, but it rejected their claim for the three funds added in 1999 because they were added to the plan's investment lineup more than six years before the complaint was filed—and the six-year statutory period had expired.

The Ninth U.S. Circuit Court of Appeals affirmed, but the Supreme Court reversed and sent the case back to the Ninth Circuit, ruling that plan fiduciaries have "a continuing duty to monitor trust investments and remove imprudent ones and finding, therefore, that the plaintiffs could move forward with their claims."

So what does the case really mean to plan sponsors? Vanguard ERISA and Fiduciary Services analyzed the impact and broke down the decision into three major points:

  • Most importantly, the Supreme Court did not decide whether Edison International breached its fiduciary duties by offering retail class shares of mutual funds instead of institutional class shares. Rather, the Court simply decided the technical issue of timing and sent the case back to the lower courts to review more substantive issues, including what steps fiduciaries must take to prudently select and monitor plan investments and whether the Edison fiduciaries breached their duty of prudence in this case.

    "The Tibble decision means that the Ninth Circuit is able to review the question of whether the fiduciaries have breached their duty of prudently monitoring the investments," Mr. Bobrin said. "What the Supreme Court provided was very narrow—they just ruled that the statute of limitations in this case can be measured from the fiduciary's ongoing duty to monitor the investment, rather than from when the single, initial decision to add the funds was made."

  • The Supreme Court's decision only addressed the technical procedural issue of the timing of participants' lawsuit. The retail funds at issue were added to the plan in 1999 and the participants filed their lawsuit in 2007, raising the question of whether the lawsuit was filed within ERISA's six-year statute of limitations. The Supreme Court found that ERISA's duty of prudence requires plan fiduciaries to regularly monitor investments in addition to prudently selecting them, and that this duty to monitor existed within the six-year period before the lawsuit was filed in 2007. Apart from these rulings, the Court did not otherwise address any other aspect of the participants' claim.
  • This decision does not change the fact that a fiduciary's best defense against the claims of this type remains a regular—and documented—review of the plan's investment lineup. "Vanguard regularly consults with plan sponsors about their investments, and we affirmatively offer share class promotions where appropriate," Mr. Bobrin said. Additionally, this decision doesn't change the fact that plan sponsors may choose a higher-priced investment option than others in the same category, provided there is a rational, well-documented reason for it—such as performance, a better investment process, or contribution to recordkeeping costs.

    "What we emphasize with our clients is having a robust process in place to monitor plan investments," Mr. Bobrin said. "For example, there may very well be a good reason for choosing a retail fund that may be a little more expensive. As long as fiduciaries are basing their decisions on a prudent analysis and documenting that process, they are putting themselves in a good position vis-a-vis their fiduciary duties of prudence."

What's next?

Now that the Supreme Court has ruled on the statute of limitations issue, the Ninth Circuit will review the questions of whether the fiduciaries have breached their duty to prudently monitor the investments. What does that duty require? How often should fiduciaries be looking at the investments? How extensive a process needs to be in place?

"The Court found that ERISA's duty of prudence requires plan fiduciaries to regularly monitor investments in addition to prudently selecting them," Mr. Bobrin said. "That goes hand-in-hand with having a systematic process in place to review investment decisions on a regular basis and to take good committee-meeting minutes. We've always encouraged plan fiduciaries to complete periodic, thorough investment reviews and to document the results—and this ruling emphasizes the importance of that prudent process."

Note:

  • All investing is subject to risk, including the possible loss of the money you invest.